China stock slump

26 December 2005

China stock slump

As a prolonged slump in the China stock market drags on and the US dollar stays on a longer-than-expected uptrend, many Chinese investors are becoming frustrated with what they see as a dearth of investment opportunities for the coming year. But a closer look at the economic picture should yield some optimism, although it appears unlikely that a bull run will kick in any time soon to fatten investors pockets.

In particular, analysts say, the government’s commitment to boosting consumption and trimming overcapacity in certain overheated sectors promises to be a long-term driver of profit growth.

And as the trial of non-tradable share reform, a key factor depressing sentiment, proceeds and financial innovation gains new ground, the stock market is anticipating new developments that will enable it to reflect the economic picture and benefit investors.

The Chinese Government has highlighted boosting domestic spending as a strategic priority for its new five-year plan, which starts next year, something Fan says promises increased government support for tourism, hotel, community services, and commerce sectors.

And given the State’s shift from relying mainly on investment to seeking support from both investment and spending to maintain economic growth, the property market, though still under scrutiny, may witness further price increases next year and stands as a long-term investment option for wealthy investors.

Although a broad boom in the property market has triggered government measures in the past two years to bring prices down to more sustainable levels, "the time of really hefty price increases in the property market has yet to come," says Fan.

According to him, China’s Engel coefficient, which measures spending on food as a percentage of total consumption, is still above 40 per cent, close to the 38 per cent level that international experience suggests will trigger a substantial increase in spending on housing.

"What Chinese people want to invest in most in the coming years will be housing," he says.

"Although turnover in the market slowed down this year, the growth of new space available dropped even faster. So there is upward pressure on prices due to the shortage of supply."

Another major area expected to benefit from the State’s promised support over the next five years is equipment manufacturing, as technical upgrades are urgently needed to help trim overcapacities in such overheated sectors as steel and cement, analysts say.